The Pay As You Earn (PAYE) Repayment Plan

RED ALERT: PAYE Is Under Assault by President Donald Trump

If you’ve been following student loan-related news, then you’re well aware that President Trump’s proposed 2019 budget includes ELIMINATING the Pay As You Earn Student Loan Repayment Plan from existence, which is a terrible attack on ftudent loan forgiveness, since PAYE is certainly the best repayment plan currently on offer.

For now, there’s no way of telling how this will all shake out, and all we can do is wait for Congress to decide on whether or not they will strip these programs from existence, or amend President Trump’s proposed budget to protect these essential benefits. Read through this post for all the details about what PAYE is, how it works, and for advice on determining if it’s the best Federal Student Loan Repayment Plan for your unique situation.

What PAYE and REPAYE do is they set your monthly student loan payments at a specific percentage of your discretionary income, making it easier to qualify for lower monthly payments, but more importantly, they also promise that your loans will be entirely forgiven after you’ve made 240 monthly payments (20 years worth), making them an excellent way to qualify for Federal Student Loan Forgiveness benefits.

But Before We Dive Into Those Details…

Let me fill you in on a little secret: the fastest, easiest way to get rid of your student loans without paying for them out of pocket is to hire an expert who can help you consolidate them, reorganize them, refinance them, modify them, or challenge their legal validity.

In fact, the single best way to get rid of your loans is to use the Borrower’s Defense Against Repayment Program to try and get a discharge, which wipes them clean, and allows you to walk away without having to pay another penny toward your outstanding loan balance.

But to file a successful Borrower’s Defense Against Repayment Application, or to qualify for other complicated benefits like Bankruptcy Discharges, Closed School Loan Discharges, Loan Forgiveness Benefits, and more, you’ll want to pay an expert to help you figure out which program will work best for you, and ensure that you do everything correctly so you can actually receive the promised benefit.

That’s where the Student Loan Relief Helpline comes in – they’re my favorite student loan debt relief agency because they’re staffed with actual experts who will review your case, give you advice, and offer to handle everything for you (for a fee, of course).

Anyone who isn’t great at reading and understanding complicated legal language would do well to enlist the Helpline’s assistance, as they’ll dramatically increase the odds that your benefits applications are approved.

Your first call to the Helpline is free, so the only thing you’ve got to lose is a few minutes of your time.

What is PAYE?

Compared to the previously available Student Loan Repayment Plans, the Pay As You Earn program is substantially more affordable in short-run, typically offering significantly lower monthly payments.

PAYE offers two major benefits to those eligible for the plan, including:

Early loan forgiveness (total Federal loan forgiveness after just 20 years of making payments)

Low monthly payments (monthly payments are limited to just 10% of discretionary income)

What Does PAYE Do?

The Pay As You Earn plan caps monthly student loan payments to just 10% of discretionary income, which means that if your discretionary income were $1,000 per month, then your maximum student loan payment would be just $100.

What that means is that your monthly payments will fluctuate over time (the amount is recalculated and reset each year), rising and falling as you make more (or less) money.

That’s a great temporary solution for people with extremely high debt to income ratios, but it do present some long-term downsides since this structure could end up costing you quite a bit of coin over the long-haul (more on that in a bit).

How are PAYE Monthly Payments Calculated?

Once you’re enrolled in the Pay As You Earn student loan program, your monthly payments will be calculated according to a precise formula based on the following factors:

Adjustments each year to changes in your annual income and family size

Scheduled according to a 20 year repayment term

Monthly payments under this plan are guaranteed to be less than the standard 10-year repayment plan, and are usually lower than the payments offered by any of the other plans as well.

To get a precise idea of just how much your PAYE monthly payments will be, head on over to the Government’s official Repayment Calculator, plug in the appropriate values, and you’ll know exactly what to expect.

What Loans Are Eligible for PAYE?

Only some Federally-funded student loans (Direct loans) are eligible to enroll in the Pay As You Earn student loan repayment plan.

Here’s a list of the Federal student loans that are eligible for the PAYE program:

Direct Subsidized and Unsubsidized Loans

Direct PLUS loans made to students

Direct Consolidation Loans, but not Direct or FEEL PLUS loans issued to parents

Here’s the real kicker though – only certain types of borrowers (referred to as “new borrowers”) with these types of loans can sign up for the plan.

Who are “New Borrowers”?

The Federal Government defines “New Borrowers” as individuals who meet the following criteria:

New Borrowers did not owe any money on federal student loans as of October 1st, 2007, AND

New Borrowers have received a qualifying federal student loan disbursement on or after October 1st, 2007

What’s that mean?

If you had loans before October 1st, 2007, you won’t be able to enroll in the PAYE plan, unless you first pay those loans off entirely, then take out a new loan and use PAYE to pay off that new loan.

This leaves the vast majority of those holding federal student loan debt out of contention for leveraging the Pay As You Earn plan, and it’s by far the biggest limiting factor in this program’s attempt to provide effective Debt Relief for Federal Student Loan Debt.

However, if you don’t qualify for PAYE because your loan is too old, don’t give up, because it’s highly likely that you’ll still qualify for it’s sister plan, REPAYE, which offers the same benefits.

Also, keep in mind that the required qualifications don’t stop at the type and age of your loan, because in addition to being a “New Borrower”, you must also have what the Government calls a “Partial Financial Hardship” in order to qualify for PAYE.

What is a Partial Financial Hardship?

To qualify for the Pay As You Earn plan, you’ll need to prove that you’re facing a partial financial hardship, but what does that mean?

A partial financial hardship is defined as existing when the amount of money you owe on your loans each year, as calculated under the standard 10-year repayment plan, exceeds 10% of your “discretionary income”.

What’s discretionary income?

Discretionary income is defined as your annual income, minus the poverty guidelines for your family size.

To find out if you’re facing a partial financial hardship, add up the amount of money you owe on eligible student loans (including only Federal Direct loans and FEEL Loans), calculating this amount according to the 10-year Standard Repayment Plan, then check to see if that exceeds 10% of the difference between your adjusted gross income and 150% of the poverty line for your family size in the state where you live.

If you do qualify, then you’ll be able to enroll in the PAYE plan, but if you don’t, you’ll have to look elsewhere for debt relief.

Note that it’s much easier to qualify for a partial financial hardship if you’ve got a large family size, but if you’re making decent (or great) money and simply spending too much of it, then you probably won’t make it through this eligibility filter.

If you’re a public service worker with a high debt to income ratio, then you’ll probably qualify easily.

If you’re a recent law school graduate with hundreds of thousands of dollars in Federal student loans, then you’re almost guaranteed to qualify.

The easiest way to find out whether or not you qualify is to enter your information into the Government’s official and online Repayment Estimator.

Pros & Cons of PAYE

To tell you the truth, not everyone is going to want to enroll in the PAYE plan. While this program might sound like a miracle cure, you’re going to have to do some math to decide whether or not it’s actually right for you.

For some borrowers, PAYE will only exacerbate their financial distress, stretching out their student loan payments for years, adding interest to the debt, and making it even harder to get out from under.

But for other borrowers, PAYE will provide significant financial relief, allowing decreased monthly payments, some breathing room to save up cash, and the opportunity to do things like start a family, launch a business, or purchase a home.

Here’s a breakdown of the major pros and cons to the PAYE repayment plan:

Benefits to the PAYE Plan

There’s a reason that this plan was introduced just after a huge economic meltdown – it was created to offer serious financial assistance to people who are struggling to make ends meet.

And PAYE lives up to to the expectations, at least for certain situations, as it offers some serious benefits, including:

Payments are Based on Earnings

While this is nothing new (the Income-Based Repayment Plan and the Income-Contingent Repayment Plan already set monthly payments based on earnings), the PAYE plan offers a significant reduction in the monthly maximum cap.

With IBR and ICR, you could have been forced to pay up to 15% of your discretionary income each month, while with PAYE, you’ll only need to pay a maximum of 10%. Don’t think 5% makes a big difference? Do the math and think again.

Subsidized Loans Won’t Accumulate Interest

One of the big concerns with PAYE is that your monthly payments could end up being so small that they wouldn’t even cover monthly interest accrual, leading to interest capitalization. Interest capitalization means that the unpaid interest is tacked onto the principle of the loan, making your loan more expensive in the long-run, and your monthly payments higher in the short-run.

Fortunately, the PAYE plan includes a provision that protects those of you with certain types of Federal student loans from interest capitalization, because the Government will have to pay your unpaid interest on Direct Subsidized Loans (or on the subsidized portion of your Direct Consolidation Loans) for up to three consecutive years from the date you begin making payments under PAYE.

Interest Capitalization is Limited

Limits on interest capitalization – Should you run past that three year protection, as long as you’ve got a “partial financial hardship” (defined below), your accrued unpaid interest won’t be capitalized, even if it accrues during deferment or forbearance.

Unpaid interest will only capitalized under PAYE if you don’t have a partial financial hardship, and the amount of interest that capitalizes is limited to just 10% of your original principal balance, calculated from the time that you began making payments under PAYE.

Loan Forgiveness Comes at 20 Years

If you use the PAYE plan and meet other certain requirements, whatever is left of your original student loan balance will be forgiven after you’ve made 20 years’ worth (240) of scheduled, full, and on-time monthly payments.

Unfortunately, the only way that there could be anything left after you’ve made 20 years of payments is if you’ve missed payments, had problems that lead to capitalization, or encountered other issues that caused your debt to increase, since the PAYE plan is supposed to have you set to finish making payments at 20 years anyway.

Loan Forgiveness Can Come at 10 Years

This the best way to leverage the PAYE plan, but its also restricted to those individuals who qualify as “public service” workers. Those on the PAYE plan who work full-time for a public service organization (basically any government or non-profit job) will receive complete loan forgiveness after making just 10 years’ worth (120) of scheduled, full, and on-time monthly payments.

This is a huge benefit to those who can qualify, since it dramatically speeds up the prospect of paying off student loan debt early. This program is an enhancement to the traditional Public Service Loan Forgiveness Program, which worked under any of the other available student loan repayment plans, but didn’t offer loan forgiveness until 20 years of payments had been made.

Downsides to the PAYE Plan

Even with all the advantages listed above, there are some issues with PAYE that can lead to increasing the amount of money you spend on student loans, especially in the long-run.

Here are the disadvantages to enrolling in the Pay As You Earn student loan repayment plan:

Long-term, PAYE Will Probably Cost More

While your monthly payments get reduced under PAYE, making it more affordable in the short-run, you’re going to end up paying your loan off over the long-run since reducing monthly payments stretches out the loan’s term, allowing more interest to accumulate over time.

For some people, this isn’t as much of a problem, since the overwhelming reason for signing up is to reduce monthly payments to get them into an affordable range, but if you aren’t having trouble making monthly payments, then PAYE will end up costing you money.

You Must Submit Annual Documentation

The PAYE plan isn’t run on the “honor system”. To qualify for the plan, you’ll have to submit paperwork to prove how much you’ve made each year, and failing to do so will lead to your unpaid interest being capitalized (dramatically increasing the life-time cost of your loan), or even resulting in you being booted from the program.

If you’re good at keeping track of your income or you’ve got a long-term salaried type position then this shouldn’t be a problem, but it could become a nightmare for those of you who are unreliably employed, working for commission or earning unstable types of income.

You Need a Partial Financial Hardship

You’ll only be eligible for the PAYE plan if you’re facing a partial financial hardship (explained below). The good news about this piece is that you’ll get to count FEEL Program loans when determining how much you owe, but the bad news is that only your Direct Loans are eligible for PAYE.

Depending on your unique situation, this could result in the possibility of you having to make monthly student loan payments under multiple repayment plans. It’s always easier to have all your loans on the same plan, just for the sake of logistical clarity, but you may not be able to do that in this case.

You Might Owe Taxes on Forgiven Debt

While President Obama has submitted a proposal to erase the tax liability for forgiven debt, that was rejected and the current Student Loan Forgiveness and Income Taxability Laws state that anyone who has debt forgiven will end up having to count whatever amount of debt was forgiven as taxable income, and pay the IRS accordingly.

That may not seem like a big deal, but because the forgiven debt has to be reported as annual income in your IRS filings, that could dramatically increase the amount of tax money you owe during the year you wipe out your debt, causing you to face a massive, one-time tax bill.

In fact, for some people, that may be an even worse financial situation than facing years of low monthly payments, and personally, I think we’re headed toward what I’m calling the Coming Student Loan Taxpocalypse, which will hit when everyone’s loans start getting forgiven, and they end up owing tons of money to the IRS.

I think this is such a problem that I’ve created an entirely new website to help people deal with their new tax liabilities, called Forget Tax Debt, which goes through all the same sorts of topics I cover here, but for tax-related issues instead.

How Can I Maximize PAYE Benefits?

The best way to take advantage of PAYE remains enrolling in the plan while also signing up for the Public Service Loan Forgiveness Program, which would allow you to qualify for total student loan debt forgiveness after making just 10 years of monthly payments, and paying no more than 10% of your discretionary income during that time.

Also, keep in mind that because PAYE is income-based, it’s possible that you could even qualify for complete Federal Student Loan Forgiveness after 10 years of issuing payments, even if your payments were set at $0 per month during that entire time period! You could literally get your loans entirely forgiven without paying a penny!

PAYE is an extremely powerful repayment plan, and combined with the PSLF program, can work wonders for those of you facing terrible student loan situations.

If you’ve got student loan debt, and especially if you’ve got a lot of it, you will most certainly want to evaluate the benefits of this new loan repayment plan.

How Do I Apply for PAYE?

First, contact whoever services your loan to ask if you qualify for the program (even if you think you do, or don’t, you might be wrong).

Once you’re sure that you’re eligible to enroll, head on over to the Government’s official student loans website (www.StudentLoans.gov), sign in, and complete their electronic request to enroll in the Income-Based (IBR) / Pay As You Earn / Income-Contingent (ICR) repayment plan.

Proposed Changes to PAYE

Unfortunately, 2014 saw the introduction of some new proposals from President Obama’s Administration which would massively change the way that PAYE and Federal student loan forgiveness works.

These proposed updates including major benefits, but also significant downsides. Depending on your specific financial situation, the adoption of proposed changes could be an awesome cause for celebration, or a disastrous reason for despair.

Positive Changes:

It’s not all bad. There’s some significant benefits to the proposed changes introduced in the President’s Proposed 2015 Fiscal Budget, including:

It’s Coming to Everyone!

Pay As You Earn will be made available to everyone with Federal student loan debt. This change is already virtually guaranteed to occur, and is set to take place in December, 2015.

Tax Penalties May Disappear

Current law stipulates that qualifying for Federal loan forgiveness allows you to wipe out your debt, but also forces you to pay taxes on whatever debt was removed (because that debt has to be reported to the IRS as “income”).

This can present a major problem for those who really need some financial assistance, and it would be an excellent update to Federal benefits if the tax penalty part were removed from the equation.

Monthly Interest Accrual May Get Capped

The monthly interest accrual on Federal student loan debt may be getting capped at just 50%.

Currently, when you make a monthly payment that isn’t high enough to cover your interest accrual, whatever amount of interest that isn’t being paid gets added to the principal balance of your loan (through the process of interest capitalization), making you owe more money in the long run.

Right now, there’s no cap on the amount of interest that can accrue, which dramatically inflates the loan debt of people who aren’t paying enough to cover their debt’s interest accumulation!

Negative Changes:

On the other hand, there are some serious potential downsides that may arise from changes to Federal law, some of which could stand to cost you tens of thousands of dollars, including:

Big Debts May Not Qualify

High debt borrowers (those with over $57,000 in federal student loans) won’t qualify for forgiveness under PAYE at the 20 year mark, but will instead have to keep paying back their loans for a full 25 years.

5 years may not sound like much, but that’s another 5 years of potentially not being able to start a family, purchase a home, found a business, or do other things that student loan debt is preventing.

PSLF May Get Capped

Public Loan Service Forgiveness will be capped at $57,000, meaning that borrowers who owe more than that amount won’t be able to get the rest of it written off at the 10 year mark, and will instead need to continue making payments to the full 25 year limit before they can wipe out the remaining debt.

This would significantly reduce the effectiveness of Federal loan forgiveness for those with extreme debt (the people who need assistance the most!).

Only IBR Payments May Count

Only payments made under one of the Income-Based Plans (PAYE, IBR, ICR, etc.) will count toward PSLF loan forgiveness, meaning that it won’t be possible to be on the Standard Repayment Plan, Graduated Repayment Plan, etc., and count those monthly payments towards PSLF’s required 120 monthly payments (10 years’ worth of payments).

This update is no big deal for those people who don’t earn much, but it poses a major financial setback for people with high incomes.

Filing Income Separately May Not Help

Married borrowers will no longer be able to separate their incomes when determining monthly payments under the income-based repayment plans. Currently, couples who file their taxes separately can leave out their partners income when determining how much they need to pay on their monthly Federal student loan payments, sometimes significantly reducing their monthly payments.

Some couples are able to continue earning huge incomes without having to pay much on their student loans, all while working toward that eventual loan forgiveness.

When Will These Changes Go Live?

These proposed changes were included in President Obama’s proposed 2015 fiscal budget, but the good (or bad news, depending on your unique situation) is that they weren’t mentioned at all in the eventual CROMNIBUS that got signed into law.

What’s that mean? For a time, none of these changes are going into place, but since the Higher Education Reauthorization talks are set to commence this year, 2015 is likely to see some major changes to the rules regarding Federal student loan debt.

Be sure to check back often for updates, as I’ll be following developments closely and reporting all changes in real time.

Questions?

If you have any questions about the Pay As You Earn Plan, please feel free to ask them in the comments section below.

You’re virtually guaranteed to qualify for some form of assistance from one of the above mentioned programs, so don’t give up yet!

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Disclaimer:Information obtained from Forget Student Loan Debt is for educational purposes only. You should consult a licensed financial professional before making any financial decisions. This site receives some compensation through affiliate relationships. This site is not endorsed or affiliated with the U.S. Department of Education.

Tim's experience struggling with crushing student loan debt led him to create the website Forget Student Loan Debt, where he offers advice on paying off student loans as quickly, and cheaply, as possible. His new website Forget Tax Debt, offers similar advice to people with back tax problems.

150 Comments

CindyNovember 2, 2018

Tim,
Quick question. My PAYE loan amount is 100k, I make 50 k a year. If in the first 5 years my income triples will they continue to take 10% for the remainder of the balance and do they stop when the loan amount is forfilled or do they take the full 240 payments and I end up paying a bunch more than needed? Thanks.

Each year you have to recertify your income and your monthly payments are set based on how much you’re making. If your income triples, you’re going to be paying much more each month, but you will NEVER pay more than you owe. Once the loan balance is paid off, it’s done and gone. You definitely will not be making 240 payments if you’ve already paid off the balance earlier.

To make a long story short, I’ve been paying off my Federal and private loans for 11 years. (I had another college loan elsewhere that I paid off in 3 years.) When I graduated, I had difficulty getting a job and making my $1000+ (principal + interest) monthly payments for Sallie Mae. When things got tough, SM told me I didn’t have any lower repayment options and steered me towards a forbearance. Of course, I didn’t know there would be a fee until once we started the application. I also had to do deferment on my Federal loans. Once those ended, I was back to the $1000+ monthly payments. After about a year or two struggling, I was again told that I was already on the lowest repayment plan; so I had to do a forbearance and deferment again. The time period ended, and I was back to the $1000 a month. Again, I was able to make the payments for a bit. I also had a job working at a public library, so I was hopeful to qualify for loan forgiveness. However, I learned that I didn’t because I didn’t work 30 hours (mine = 25-28 average.) Ultimately, I was going to have to do a forbearance/deferment again. This time, the SM rep recommended I considering doing a lower repayment plan. I told the rep that I was already on the lowest according to SM. Well…he/she checked and said I could do an interest-only repayment plan. (What?!) I could do it for a total of 4 years (2 year increments.) I also asked if I could still put extra money towards my loans. Yes! Naturally, I decided to switch to the repayment plan. What I want to ask is…when did the interest-only repayment option with Sallie Mae start? Was it always an option and shady SM didn’t let me know? It was annoying that I would always be told something different by a SM rep. (I actually have it documented…but no actual recordings.) Thanks.

Sorry to hear about all the trouble you’re experiencing with your loans! If it makes you feel any better, your experience is not atypical. I get comments like yours ALL THE TIME from people struggling under similar circumstances.

Student loan debt is a killer, and especially when you have private loans, which there isn’t much you can do to get rid of. My suggestion for you is that you make sure that you’re able to find a job that qualifies for the Public Service Loan Forgiveness Program and to make certain that you’re also enrolled in an eligible Income-Driven Repayment Plan (PAYE counts, so does REPAYE).

The Interest-Only option may not qualify you for PSLF, so I’d be very skeptical of using this plan if you’re counting on getting your loans wiped out via forgiveness, but remember too that PSLF only offers Federal Loan Forgiveness, so it won’t impact your Private stuff at all. If you need help with Private Loan Forgiveness, check out my page on that here.

I’d be extra cautious about using interest-only, however, if it means that you’re going to accumulate more long-term debt than the alternative. You should be doing anything you can to avoid your debt building month over month, because allowing a year or two of interest buildup is typically what causes people to get completely trapped in debt for life.

I am about to apply for the PAYE plan but I did see the thing about Trump proposing a halt on the program. If we are already accepted would we be grandfathered in to keep the plan, until we aren’t qualified anymore? Or would it completely erase the plan?

Hi Tim, If you are repaying on PAYE and you temporarily have to request forbearance, not because of a decrease in salary, but because of an increase in personal expenses, how does that affect the 20 year forgiveness feature? If you are paying less than your required payment while under forebearance, does the 20 years payment period start over to year one once you stop needing forebearance? Or does the 20 year payment period go on hold and continue once you are making full payments again. Meaning you do not lose the time you accumulated making full, on-time payments? Thanks

It’s not actually 20 years to get forgiveness, but 20 years worth of payments, meaning 240 monthly payments have to be made for you to receive forgiveness. So, each payment that you miss making while your loans are in forbearance simply won’t count against your 240 payment threshold, and that will delay the forgiveness for you, but that’s it.

Hi Tim,
I have Direct Subsidized and unsubsidized loans and direct consolidation loans. What should I do if I have multiple loan servicers, if I want to enroll in the PAYE? Should I consolidate all of my loans first and then apply for PAYE?

Consolidation is a bad idea because then your Subsidized loans would lose that status, and you’d risk losing eligibility for other benefits as well. I would enroll in PAYE on all the loans (that qualify) and REPAYE on the others.

I recently got married and foolishly filed taxes with my spouse. He makes considerably more money than I, $150,00+ while I bring in 21,000. If I start the PAYE plan now (we filed jointly 2015), am I stuck making payments under both of our income or will I be able to resubmit something the following year after filing separately?? Thanks in advance!

No matter what, you’re going to have to file taxes jointly, so you might as well start PAYE (if you can qualify… you probably won’t since his income is so high). You’re probably going to need to sign up for REPAYE instead.

This loophole (being married and raking in tons of income, but filing separately so being able to take advantage of the forgiveness programs created for ACTUAL poor people) was closed years ago.

I just started the PAYE program in July, 2016. When I started my balance was at $453,873.47 (original balance of $389,610). I don’t think I’ll ever pay the balance of my loan off in the 20 years as just the interest alone is almost $30K for this year. So I’d have to make $300K just to cover the interest. I’m paying about $15,000 for the first year (based on my income of $150K).
My questions is, will there be a tax liability for me after 20 years when my loan is forgiven? I heard that I will be taxed like it was ordinary income on whatever balance I have left, and I’ve also heard that only any interest that I haven’t paid is what my tax liability will be. I want to start putting money away to plan on covering those taxes so trying to find out.

Also, I’m a dentist; would I qualify for the Public Service Loan Forgiveness?

I think you’ve won the contest for highest student loan balance ever. I can’t recall hearing about anybody else really even crossing the $350,000 threshold, so congratulations on that!

Remember – you don’t have to pay off your balance in 20 years, that’s the whole point of the program. Whatever you have left after making 20 years of income-based payments is going to get forgiven.

There are certain instances where the remaining balance forgiven gets taxed, and others where it is not taxed.
It’s possible that you will have a tax liability, but I think you’re going to need to speak with a CPA to make sure.

Also, it’s POSSIBLE that you could qualify for Public Service Loan Forgiveness, but that depends on your specific employment details. Did you read my page about PSLF Benefits? Take a look at the eligibility conditions and you’ll have to figure out if you qualify.

For assistance, I would considering calling the Student Loan Relief Helpline. This is a for-profit company that handles Federal student loan consolidation, forgiveness applications, etc. You can pay them to handle everything for you, but you could also simply ask them questions and probably sort out whether or not you qualify for PSLF, without having to spend any cash. You can reach them at: 1-888-694-8235.

I am not sure if I got scammed or not, but I did fall for paying a nice hefty fee to get loan forgiveness through a company called First Grad Aid. I am not sure what I should do. I was told that I have the Revised Repay As You Earn plan, which I would have $0 payments for 300 months and then once the 300 months have passed, I will not owe anything. Does this sound legit? Also, I am a part-time college instructor, would my teaching be considered as public service for loan forgiveness?

Contact whoever services your loan and ask them which Student Loan Repayment Plan you’re actually on. Confirm with them that you’re eligible for Federal Loan Forgiveness, and ask how many payments you’ll have to make to earn it. I think it will be 240 (20 years of payments), because your part-time college teaching isn’t going to be enough for the Public Service Loan Forgiveness Program (those benefits require full-time employment in an eligible position).

Can you give me primary source documentation pertaining to Capitalized Interest? My interest has capitalized and has surpassed the 10% mark.

Specifically:

Interest Capitalization is Limited

Limits on interest capitalization – Should you run past that three year protection, as long as you’ve got a “partial financial hardship” (defined below), your accrued unpaid interest won’t be capitalized, even if it accrues during deferment or forbearance.

Unpaid interest will only capitalized under PAYE if you don’t have a partial financial hardship, and the amount of interest that capitalizes is limited to just 10% of your original principal balance, calculated from the time that you began making payments under PAYE.

I’m not an official representative of the United States Government, or an attorney. I won’t be providing any “primary source documentation” for anything, but you have access to Google, and you should be able to find everything that I ever have using their search engine.

I am currently going to be laid off and I was wondering what is better… Unemployment deferment or getting on REPAYE (Revised Pay as You Earn)? I have both subsidized and unsubsidized Loans. I also have a Perkin’s loan. Should I consider loan consolidation at this time before getting REPAYE?

Be careful with loan consolidation. If you consolidated a subsidized loan with an unsubsidized loan, then you’d lose the benefits that come with subsidization. I would NOT consolidate those loans together, but keep them separate and deal with them differently.

First – try to line up a new job ASAP, as being out of work is just going to make things worse.

Second – you can put your subsidized loan into deferment without worrying about interest racking up, so try doing that for as long as your lender will allow you to, and do EVERYTHING YOU CAN to keep making payments on the unsubsidized loan. Do NOT let your loans fall into default status, because that’s basically the worst case scenario, and once that happens, you lose all sorts of awesome benefits.

Third – you may want to call the Student Loan Relief Helpline and ask for their assistance in determining how to proceed. These guys are serious experts at restructuring and handling excessive student loan debt. If it’s possible to reduce your monthly payments, they will find a way to do it. If you qualify for some forgiveness benefits, they will alert you to them. You can reach them at 1-888-694-8235.

I am 55 years old, got remarried in May 2015; my husband is retired and only has unearned income. I have Parent Plus Loans (Federal with Navient) to the tune of $50,000.00, which are currently in a forbearance. The first payment is due next month, a week before I will have major shoulder surgery, and will have no personal income for 6 months.

Because my new husband has some investments, I have decided it would be best to not file a joint return, as I, in no way, want him responsible for these loans I had prior to marriage.

When I obtained the forbearance a year ago, Navient said that I should probably apply for a consolidation loan. I was just reading up on repayment of consolidation loans, like possibly under the PAYE (Pay as you earn) option that our president signed into law. But I read that even if we file ‘Married-Individually’, that his income will be considered when they calculate a repayment plan. So, with all that being said…I understood that we should not file joint because of my loans, BUT, if the ONLY worry I would have if we filed ‘joint’ is that they might take some of his tax refund, then I might as well consider filing ‘joint’, as we’d do better with what we owe. If we file jointly, I don’t want them billing him or making him responsible for my loans. Are you aware of how this works? Also, If I consolidate, will they consider all of his income, even though all of it is unearned? (It’s primarily Social Security and a little money he takes from his investments monthly).

I hate to pay an attorney to get these answers, but I will if I have to. But I saw your site, and thought you might have some information. I am an office clerk, made $18k last year, and this year will be half of that since I’m having surgery next month.

I apologize if my information seems disjointed…just trying to state the facts. Any information or ideas would be greatly appreciated!! Thank you very much in advance!

Make that 3 questions and again sorry but reading some of the comments I can really see that you have a firm grasp of this whole loan process.

Question 3) if both you and your wife have loans and are enrolled in PAYE how to they determine your 10% income when you have to pay 2 separate loans to 2 PAYE programs. My wife and I file our taxes jointly. Thank you , very interested in this answer.

1) I was wondering if you know exactly when in December the changes for PAYE will take place and allow older borrowers from before October 2007 will be allowed in?

2) with the PAYE plan if my payments pay off my student loan before the 20 years are up do I still need to keep paying; and if I use the PSLF program and the cap is 57,000, does that mean on year 10 of public service my loans would go from 100,000 to 33,300 (100,000-57,000) and then you would stay in PAYE until the remaining debt is payed off?

1. Changes are in place now. They were updated in Oct/Dec time frame, back in 2015.

2. You do not need to keep paying if your payments cover the entire cost of the loan. The cap will not be coming. No one has even brought it up since it was originally introduced, it’s dead in the water.

Thank you for this wonderful website. I just graduated and I am eligible for ICR, IBR and will be eligible for the new Pay as you Earn. I also work at a public university so I will be eligible for the ten years public service forgiveness.

Unfortunately, I am one of those people that has very high debt. Under the new rules my debt won’t be forgiven after ten years working at a public institution.

My questions is: If I consolidated my loans and entered repayment right now before December 2015, would I be under the “old rules” for ICR and IBR? Would my debt still be forgiven after 10 year of public service? ( Could I not count the future husband (who I don’t yet know and feel bad making responsible for my massive debt) on my income? Or will the “new rules” prohibiting the forgiveness of large student debt apply to those plans set up before the December 2015 plans go into affect as well?

There are no new rules yet for Public Service Loan Forgiveness, and even if you’ve borrowed well over the previously proposed $57,000 cap, you will still have access to complete student loan forgiveness after making 10 years’ worth of qualified payments.

Be VERY careful about consolidating your loans! First, do not consolidate any Federal loans with Private loans, because you’ll lose all access to Federal benefits and assistance. Second, don’t consolidate different types of Federal loans together, because you could risk losing some of the benefits for certain loans (like Perkins loans consolidated with non-Perkins loans losing access to Perkins Loan Forgiveness).

You need to be VERY careful about any consolidation of student loan debt, and I would advise against it unless you’ve had an attorney and/or financial adviser review your plan.

In short, don’t worry about the $57,000 cap that was discussed many months ago – it hasn’t been brought up since – and don’t consolidate your loans unless you have the plan reviewed by an expert before going through with it.

I have a question. Let’s say that when I graduated and qualified for PAYE my monthly repayment was set at zero because it was based off 2014 taxes. This year I worked for a company and made like 40k. However I might be unemployed soon. Yet on my taxes it’ll say I made a lot more and that won’t be the case (in terms of future finances). Can I submit documents to readjust monthly payments based on most current or will I be forced to pay monthly based on 2015 taxes even though that will not be my current situation. Secondly, how would I go about doing this, if the option to evaluate current not 2015 taxes were a possibility?

Unfortunately, I don’t think you can do this. As far as I know, the repayment amount is set based on your previous year’s IRS tax filings, and payment amounts are only updated annually. However, since you have Federal Student Loan Debt, I’d recommend calling the Student Loan Relief Helpline and asking them about it. They will be able to tell you exactly how the process works. You can reach them here: 1-888-694-8235.

Please note that the Student Loan Relief Helpline is a private organization that offers consolidation/refinancing products and services. They’re not a Government Agency, but I refer people to them all the time because they are true EXPERTS at sorting out what you can do, what you qualify for, how best to structure your loans, etc.

I am set up on the PAYE repayment plan but I have a unique problem. My husband and I have separate bank accounts and split all bills. His money is his money and my money is mine. We have to file our taxes together to keep from paying in thousands of dollars. Due to this I have to include his income in my PAYE repayment, making my payment $658.00 a month. This is two of my paychecks! Is there any way besides filling taxes separately that will allow my payment to be based off only my income? Can I provide bank account information and pay check stubs to show my income?

The short answer to your question is “No”. Unfortunately, if you file taxes jointly, then both your incomes will always be included in the calculations to determine your monthly student loan payments (regardless of which Income-Based Repayment Plan you’re enrolled in, meaning PAYE, Income-Contingent and Income-Based Repayment).

Quick question. I was eligible for PAYE so I signed up, and it was great for the year I was facing financial hardship. Now I tHe a job as a pharmacist, and am making good money. I want my payments to remain 10% of my annual income, and stretch it out over 20 years to just have it forgiven. I know this is probably not the best option, but I want to start living my life.

My question is, now that I am not in financial hardship, I won’t get booted from the program correct? I just keep making my adjusted monthly payments for 20 years and I will be fine? Or do they ‘re-evaluate your financial hardship annually and kick you from the program if you don’t ‘re-qualify each year?

Unfortunately, they do reevaluate your financial hardship annually, based on your IRS filings, and it’s possible that you will be booted from the program and returned to the Standard Repayment Plan automatically. However, keep in mind that some Doctors, Lawyers, Nurses, Dentists and all sorts of other Medical Professionals who manage to get their loans forgiven after making just 10 years worth of payments, via the Public Service Loan Forgiveness Program (PSLF). I would imagine that it may be possible for your to qualify for the benefit as well…

If I were you, I’d read my page about PSLF (linked to above), and I would contact the Student Loan Relief Helpline to ask them for advice on the best way to structure your debt. This is a private organization that offers products to help you reduce monthly payments and apply for loan forgiveness benefits, and while some of their services cost money, you could probably get some information out of them for free over the phone.

i currently have a large chunk of private student loans, with a monthly payment of $1000. Currently my federal student loans are in deferment but they should be back in repayment in October or November. My private loans currently cost me half of my net income per month. I know that the pay as you earn program has a payment of 10% of discretionary income but what if you do not have any discretionary income. Looking at the repayment calculator even with the pay as you earn my monthly federal student loan payment would be around $200, leaving $800 for housing, food, transportation and medical expenses. if there any way to have the private loans payment be considered for income repayment for the federal loans or anything else that can be done?

Tim, I think that you would be very interested in looking at my recent SSRN working paper that comprehensively analyzes the debt forgiveness tax liability under all of these Plans. It is at http://ssrn.com/abstract=2615561. I also have a paper posted on SSRN on the new REPAYE Plan at http://ssrn.com/abstract=2629645. Enjoy. Dr. Gregory Crespi

Thank you for sharing those links with the audience here! I just read through the abstracts and I’m curious to hear what you think the best solution to each of these issues would be.

For the Law School Tax Liability Bomb – it sounds like you think the law should basically remain as is, but with an amendment to allow people to pay the taxes due on their forgiven debt over a period of several years (rather than all at once)? That sounds like a great idea to me!

For the REPAYE Plan – this was very interesting to me. I had thought that President Obama’s promise was to open up PAYE to everyone, regardless of when they took out their loans. I’m going to have to investigate this REPAYE plan further, because I wasn’t even aware of it yet. Thank you so much for bringing it to my attention!

Hey I have a question.. Lets say I am qualified for the pay as you earn repayment plan for the 1st 5 years. I know make 80k.. What happens then? Do I get kicked out of the program and will have the pay all the interest that’s accrued by me not paying for the past 5 years?

Would the 5 years that Ive already been in the pay as you earn plan still go towards my term if I am switched to the income contingent repayment plan?Or will it restart and I will have to end up paying all my loans? And while I am the forgiveness plan will my credit look bad as if i’m not paying my loans?

Good question! You will get kicked off the PAYE plan and have the option of moving to one of the other Federal Student Loan Repayment Plans. I believe that you will, by default, be put on the Standard Repayment Plan, but you can change your plan at any time, so you won’t have to worry about that.

You will NOT be forced to start over and you will not end up having to pay the interest that you were not paying previously. Basically, nothing will be retroactively applied to your account, but you WILL no longer have access to the other benefits of PAYE.

Your credit will NOT be negatively affected by being enrolled in PAYE, or for using the forgiveness benefit once you actually qualify for it. That is absolutely not how this works.

I have been paying student load for the past 10 years. I have loans for graduate and undergraduate both were complete in 2006. I work under contracts, which mean there are times I don’t work. I have struggled making these payments on time. I have a student loan over the limit of forgiveness, but I have been paying over 10 years. Will this count toward one of the plans?

What do you mean that you have a student loan over the limit of forgiveness? As of today, there are no limits to the amount of money that you can have forgiven. That $57,000 limit discussed has not yet (and likely won’t ever) be made into law – it was just a proposal.

If the proposed changes are enacted (specifically the one capping the public service loan forgiveness at $53,000) will that be effective for everyone entering the public service loan forgiveness program or people that were already certified prior to the legislation? For example, I have been getting my employment certified annually for the past few years with Fed loans for the public service loan forgiveness

No one knows for sure, but everything I’ve read assumes that if PSLF does get capped, it’d only apply to future participants of the program. Basically, anyone already in college would be protected against the decreased benefit.

I don’t think you’d have anything to fear at all. And, fortunately, I still haven’t seen any actual movement on getting these changes passed into law.

You can get on the Pay As You Earn Plan as soon as your repayment period begins. Some loans don’t enter repayment until graduation, others are different. Check with whoever services your loan to see if you can get on PAYE now.

I have pay as you earn and my monthly minimum payments are $0. I can’t seem to get a straight answer about this working toward the 20 year forgiveness. Since my payments are 0 and I am paying technically the 0, does it count toward the 20 year loan forgiveness?

This article was very informative. I have the same question as above, -however – Now that the law has passed, do you know if the $0 payment still counts as a “qualifying payment”? And do you know where I can find an income limits and repayment schedule?

One more question, loan discharge can be given for schools that have “closed”, but is there a forgiveness for colleges that are open, and have provided false data about job placement for their graduates?

Yes! $0 payments definitely do still count toward your required number of payments.

Yes, there is also a Closed School Discharged AND there is a discharge for schools that lied about job placement, salaries, or other expectations. Read my page about the Defense Against Repayment Provision for details.

Hi,
As of right now I am predicted to graduate from medical school this May. Currently, all of my loans have been disbursed, and I do not plan on taking out any more new loans.
Ideally, I would like to consolidate my loans into a new loan and then enroll in the PAYE repayment plan THIS MAY (2015).
However, I have a question regarding my current eligibility for PAYE, I took out a Stafford and Perkins loan prior to October 1, 2007. I also took out a Direct Loan and Stafford Loan AFTER October 1, 2007 and I received a disbursement after October 2011.
I have paid off the loans taken out prior to October 2007 in FULL. Will I be eligible for PAYE (once I GRADUATE this May and consolidate all my other loans into a “new” loan that were taken out AFTER October 2007)???
I’m not sure if I’m eligible for PAYE because the Loans I had prior to Oct 1 2007 had an outstanding balance when I took out all my other loans. However, they no longer have any outstanding balance since they have been paid off in full.

First off, great site and thank you for educating people on student loans!

Here’s my situation: I’m currently paying off $88,000 in Direct Loans and I pay roughly $330 per month in IBR. The proposed changes to allow more borrowers qualify for PAYE sounds great at first, as my payments drop to around $220 per month. However, if the proposed “negative” changes occur, you may find me doing my best Bohdi from Point Break impersonation (if you catch my drift). I keep my payments low because I file separately from my wife. Filing jointly will immediately shoot my payments up to the max, which we could not afford to pay our bills if this was the case, let alone have a child which we plan to do in the near future. Also, I’m banking on the full amount being forgiven after 10 years through PSLF, not just $57,000. Again, this would be incredibly damaging and a significant life changer.

Is there any way that some of us would be grandfathered in or would these changes happen across the board and that’s the end of the story. The changes it would have on my life and family would be immeasurable…

This may perk you up a bit – as far as I know, NO ONE has spoken about implementing the negative proposed changes, not even once, since they were originally proposed.

I think the odds are low that they will actually get made into law. HOWEVER, with that said… this is politics, and anything can happen.

The best news I can share with you is that I think even if all of those negative changes were put into place, you would be protected from them, as they would likely not go live for existing borrowers, but only for future borrowers.

Typically, when a major negative change like this gets implemented, the Government basically warns everyone well in advance, and says “Beginning in 2 years, you all will have to deal with this significant reduction in benefits. For now, everyone who’s already in the system, is going to get away with continuing to abuse the loophole we forgot to close the first time around.”

So – keep your fingers crossed. You’re not the only person facing this situation, and you will probably end up doing just fine.

I am planning on using the PAYE plan and was wondering, is the 10% cap on interest capitalization just for subsidized loans or unsubsidized as well? I have about $158,000 in unsubsidized loans and my payments will be no where near the amount of interest accruing each month and I want to make sure that at the end of the 20 years I won’t have $350,000+ of unearned income when the loans are forgiven. Thanks!

My name is Robert. I am a medical student graduating in May and currently has a high balance of student loans of nearly $350,000. My income is projected to increase after 3 years of residency at low salaries. However, as a pediatrician, I project that I would continue to qualify for partial financial hardship according to the PAYE definition despite the higher salary due to the very high balance of student loans outstanding.

Unfortunately, I have taken small amounts of loans prior to October 1, 2007. Great Lakes my loan service company tells me that I do not qualify for PAYE treatment even though I opt to pay off the entire balance of all loans dated prior to the October 1, 2007 date.

Question #1: With whom may I discuss my situation to verify whether I qualify for the PAYE method of repayments by paying off the older loans (obtained prior to October 1, 2017)?

Question #2: What is the status of regulations to expand the eligibility of student loan borrowers for PAYE treatment prompted by President Obama’s Memorandum to the Secretary of Education dated June 9, 2014?

Thank you for your comments and advice! Please keep up the good works!

I am a medical school graduate. I have 229,000 in loans including interest. I want to know what plan will benefit me or the plan I will be eligible for Pay as you go of income based repayment plan? What’s the difference between the two? Currently I have a job at private practice and my adjusted gross income is $47083. Edu support center keeps calling me to enroll telling me that I can sign for IBR plan with my monthly payment being $381 + $39 service charge each month adding to $420 for 300 months. How can I cut down to 240 months and avoid this $39 service charge? Where can I sign up for free without this added fee and they are also asking for $695 to sign me up…wth is that for I have no idea. Can someone please help me out in understanding everything?

You will qualify for the Pay As You Earn plan if your loans were taken out on or after October 1st, 2007. If they were not, then you don’t qualify, so that’s an easy answer.

As far as the Edu Support Center people – please do not sign up with them, especially if you only have Federal student loan debt. These companies can’t do ANYTHING for you if you have Federal loans!

Even if you have Private loans, anything that these “consolidation” and “credit repair” type agencies can do, you can do yourself! All these companies do is negotiate with your loan servicer on your behalf.

There’s nothing special about what they do either – they tell the loan servicer how much you make, and how much they think you can afford each month, then work out a price that makes everyone happy.

If I were you, I would speak to the loan servicer directly and make an offer to them. Work out a monthly payment schedule that you can really afford.

My daughter has $22,000 in Stafford federal student loans. She would like to work in a “low income” school district as described in the Teacher Loan Forgiveness Program. She is a science teacher at the high school level. If she applies for the PAYE and makes her on time minimum payments for 5 years (because she is a science teacher in low income district) would she then be eligible for the up to $17,500 forgiveness assuming that she stays with that low income district for the whole 5 years? Her loans are all since 2011.

One more question.
If you have Stafford loans disbursed before 2007 that were consolidated into a direct consolidated loan later, does that disqualify you from PAYE? For example, a stafford subsidized loan taken out in 2006 was paid in full through consolidation loan in 2012. Does this disqualify you from PAYE?
Thanks again!

First of all, thanks for creating this site! Very helpful.
Second, I have a question about pre-2007 loans. If you pay off loans disbursed before October 2007, can you then qualify for PAYE? For example, I have undergraduate loans from before 2007 and new graduate loans (after 2011). If you could clarify this for me, I would greatly appreciate it. Thanks so much!

I don’t want to steer you the wrong direction, and I’m not 100% certain on whether or not that Consolidation loan would be eligible for PAYE.

I believe that it is not because it has a component loan that was initially disbursed before October 1, 2007, but I may be wrong.

To get you a for-sure answer, I would recommend that you call the Federal Student Aid Information Center (FSAIC) at 1-800-433-3243, or whoever is servicing her loan.

The FSAIC rep will be able to give you an authoritative answer, but at the end of the day it comes down to convincing whoever handles loan servicing that they need to abide by the rules of the system (and sometimes those folks aren’t necessarily willing to cooperate), so be prepared for a potential struggle heading into that conversation.

I’m Ina weird situation. I have about $40,000 in student loan debt. I graduate in May. I am also in the Army Reserve. I have SLRP via my contract which is 40K. My concern is this, my loans have not been payed on, I have filled out the necessary paperwork to do so and still nothing. So, I’m trying to do some damage control by looking at other options. I’m not sure if I qualify for PUblic service loan forgiveness because I’m a reservist, although I saw on another page on this site that reservists were included. So I’m not sure what I qualify for. I talked to a third party loan consolidation place that I have no idea if they are s good source, NSLAC.org. I’m just at a loss as to what to do and what I quslify for and if reservists qualify for anything other than what it is in their contracts because they are not reliable. Thank you!

If a LRP participant has been on active duty for 10 months, and has not heard
from the Education Incentives Branch, they should contact the following in writing:
Commander, AHRC ATTN: AHRC-PDE-I, Dept 410
1600 Spearhead Division Avenue
Fort Knox , KY 40122-5401
e-mail: usarmy.knox.hrc.mbx.tagd-pdeei@mail.mil Telephone: 1-800-872-8272

My advice would be to send them a letter and call them right away to see what’s going on.

I have a question about the IBR plan and overtime wages as I am not getting a clear answer anywhere on this matter. If you are on the IBR and you have overtime that is either not guaranteed or that fluctuates, is this suppose to be calculated into your payment? For example, if I made $20,000 last year, but earned another $7,000 solely in overtime wages, that would put me in a different payment bracket under IBR, but if that overtime is not guaranteed, it would not make the monthly payment affordable.

And if it is not to be included, is there a specific form that is needed to prove this information?

I think you’re going to need to include overtime wages, even if it’s not guaranteed, because IBR payments are supposed to be calculated on your annual earnings, and whatever you report here needs to line up with your IRS filings.

Whatever you report on your taxes should be reported for the purposes of determining IBR payments. If you report anything different from what you file taxes with, you may find yourself in a serious bind.

Thank you for all of the useful information you have gathered for those of us who have significant amounts of student loan debt.

I just entered into an agreement about a week ago through the Obama program. I must admit, it does seem too good to be true. I currently owe over $100,000 in student loans. I just finished a period of forbearance and was about to enter regular scheduled payments of $200 for one set of loans per month and had not yet received the payment amount for the remaining loans that were in forbearance. Instead I was promised a monthly payment of $20 based on my income for a total of 300 payments that could be changed to 10 years instead of 20 years once I start working 30 hours or more per week. $20 a month is certainly something I could afford but what gets me is the initial payment if $1692. I’m feeling a little skeptical about this now and I’m not sure if I should back out. I received the contract and it states something about paying $499 after a year. The name of the program is Processing Services. Please help me to know if this is legit and how I can get out of it if I need to. I have not yet made the first payment of $1692 it is scheduled to come out of my account on the 3rd of January. Please help! Thank you!

I would be very, very skeptical of this “Processing Services” if it’s a company based out of Lake Forest. There are some terrible reviews for them on Yelp, and their program sounds like a complete scam!

You should not have to be paying ANY up-front money to sign up for President Obama’s Loan Forgiveness Program. To take advantage of the program’s benefits, all you have to do is enroll in the Pay As You Earn Student Loan Repayment Plan, which you can do for free, on your own, online, here.

I really, really hope that you did not go through with this program, as it sounds like it could be a huge mistake.

I just enrolled in PAYE and my first payment is scheduled for December. It will be $561.00. This is a god-send, as I am a first year attorney and don’t quite make the big bucks yet. I do have some concerns though. . .

1) If I do eventually (fingers crossed) earn more money and no longer qualify for the program – say in 5 years – will the unpaid interest (my monthly payments don’t hit the principle right now) capitalize onto my existing amount?? Or is this where that 3 year deal comes in? Do I read that correctly? If you are in the PAYE program for at least 3 years, you won’t have unpaid interest capitalized, even if you are no longer eligible in 5, 10, or 15 years?

2) To have to loans forgiven in 20 years, do you have to make 240 payments under the PAYE program? Or is this 240 payments at all? I guess I am mostly confused as to what happens if you no longer qualify for the program. Do you go back to the standard 10 year repayment plan, and thus no forgiveness is needed?

3) Is eligibility determined based upon the amount currently owed – or do you know what figure is used for each years eligibility determination? For example, it is foreseeable that in year 17 or 18 many PAYE borrowers will have a very low balance remaining on their loans and will be making more money than they were in year 5. Will this make them ineligible for continued enrollment in the program? And again, what payment system do they return to? And is the unpaid interest capitalized in year 17?

I know. 3 years of law school and I still can’t figure this out. Sad, huh?

I hope to earn more money in my lifetime, and there is a great chance that I will. I also want to be fair and pay back my loans in a manner in which I am capable, while leaving these repayment programs for people who truly need them. However, I don’t want to put myself at an unfair disadvantage by having my interest capitalized while trying to make affordable payments.

1) Past 3 years, if you are disqualified for the program, yes, your interest will capitalize. BUT, it’s limited to an additional 10% of the principal balance of your loan (using the number that you owed when you first signed on to PAYE). So… it’s relatively risky. You may want to pay a little extra each month to cover interest accumulation in order to avoid the capitalization later.

2) To receive forgiveness under PAYE you have to make 240 payments on an eligible repayment plan. Eligible plans are the income-based repayment plans (Pay As You Earn, Income-Based Repayment and Income-Contingent Repayment).

3) Eligibility is based on having a Partial Financial Hardship. See that section of the page for details. If you do get kicked off PAYE because you no longer qualify, then you return to the Standard Repayment Plan.

Hope this helps! It’s not a simple program and there are a lot of variables involved.

Hi,
How can I apply for Obama’s Student Loan Forgiveness without having to go through the companies that are charging fees. The companies state that they their service fee must be paid upfront.
HELP!!!

You don’t need to pay anything to apply for the Pay As You Earn Plan, which is the official name of President Obama’s loan forgiveness program. Simply contact your lender and ask them what they require to move from your existing repayment plan to Pay As You Earn. As long as you qualify, they’ll have to help you through the process. Make sure you’re speaking with whoever services your loan (the company that you send your monthly payments to), otherwise you won’t be able to get anything accomplished.

I was recently married to my wife this past August and tax time is quickly approaching. She currently has $70,000 in federal loans and has had them consolidated and entered into the PSLF program. She works for a non-profit organization and plans to continue to do so. As it stands we are under the impression they will be forgiven in 10 years.

This entire thing seems absurdly unfair since this was student loans she took out before we were ever married and we have chosen to keep our finances separate yet the way things are I’m basically forced to pay on her loans.

Are there any options to avoid this or do we pretty much have to divorce on paper to avoid this unfair situation.

My understanding is that it’s still possible to file separately and take advantage of that loophole in the law (but I do want to note that personally don’t agree that this should be possible).

It sounds like the Wisconsin rule might screw things up for you, so you’re going to want to speak with a tax professional to figure out the implications here. Spending a couple hundred dollars for advice now could save you tens of thousands in the long-run, so don’t be stingy.

I disagree though with your assertion that this situation is “absurdly unfair”. When you got married, you agreed to enter into a legal contract, and the law is eminently clear about the implications of that decision.

Remember, student loan forgiveness programs will only continue to exist as long as people refrain from abusing them (like I would argue you two are clearly planning on doing).

These programs really aren’t meant to be used by households with a combined income of $130,000 a year – they’re for people with incomes like your wife’s, or for those who can’t even find steady employment at all.

While I hate to sound unsympathetic, I hear about much more significant financial problems from my readership on a daily basis, and actions like the one you’re planning on taking threaten the very lifeline that many of my readers rely on to prevent having their lives destroyed.

I spoke to someone about consolidating my student loans and signing up for the pay as you earn plan. Right now I am currently unemployed because I’m a full time student. I will start working April 2015. My annual salary will be $125,000, but I have the potential to work overtime or extra hours somewhere else. I will not be working in a public or government facility. I am single with no kids. What do you reccomend I do? Do I make too much money? Should I just pay my loans normally?

According to my student loan representative, I will pay $750 a month for 120 months. Do these numbers seem right to you? He spoke to me about the PAYE plan. It seems too good to be true. Oh, he also mentioned paying $266 a month for 3 months in order to pay for the consolidation.

My student loans are all federally-funded, and I owe about $140,000 total.

Congratulations! You borrowed just barely more money than you’re expecting to make your first year out of school, so you will likely be able to pay off your debt (even though it’s a massive debt) without running into major financial problems.

First off – don’t pay anyone to consolidate your loans for you. That’s something that you can do yourself, for free, simply by filling out some paperwork (check out out Federal Student Loan Consolidation page for details on that process).

Secondly, when were your loans first taken out? If your loans were taken out early enough, and qualify for Pay As You Earn, then you can enroll in the program on your own, and won’t require any assistance from any company to get that accomplished.

Third, are you going into healthcare? Will you be working for a nonprofit? Look into the Public Service Loan Forgiveness Program, because that might be your best bet at getting out of debt quickly.

And Fourth, you’re going to be making plenty of money to afford your payments, so the cheapest, best long-term solution to your debt (if you don’t qualify for PSLF) will be signing up for the standard repayment plan and making monthly payments in full, and on time.

The standard plan has the highest monthly payments, but costs you the least amount of money in the long-run, so I think it’ll end up being your best bet.

Fantastic forum, Tim. My question is this, if I qualify for pay as you earn for 19 years, and lose my status in year 20, do I then have to start over under another plan? If that were to happen, would my new standard rate be significantly elevated due to the undoubted interest accumulation under pay as you earn? Thank you for you help.

Are you referring to the Partial Financial Hardship qualification piece of the eligibility guidelines? The good news is that I think this requirement is planned to disappear once PAYE is opened up to everyone with Federal student loan debt (which is part of Obama’s Fiscal Year 2015 plan), so I wouldn’t worry about that piece.

However, one thing to keep in mind is that even if you do qualify for PAYE, and finish making the 20 years of monthly payments required to receive loan forgiveness, you will end up getting taxed for the amount of your remaining debt which is ‘forgiven’, since that will count as income according to the IRS.

SO – while PAYE is awesome in the short-term, just remember that there’s no free lunch, and make sure to start tucking away some cash for that eventual huge bill that’s sure to arrive down the line.

If you qualify for the PAYE repayment program and then several years later are no longer facing a financial hardship, will you then become ineligible?

-and-

On the repayment calculator, based on my current income to debt ratio, it states that nearly double what I currently owe will be forgiven after the 20 year period, and I will only pay my principal plus about 11,000 in interest. Does this seem like it could be accurate?

-and-

If your income is such that you have a $0 monthly payment for an extended period of time, does this affect the 20 year repayment plan? Does a $0 payment count as an on time payment?

FYI – I am a recent law graduate. I am 1 year into the PAYE repayment program. I plan to take a few years off for children in the future. I currently work full time for a firm in a small town and make a decent income, which was used in the calculator.

This is the second time I got that first question about PAYE and losing eligibility, so I looked into it and found some additional detail. Once you qualify for PAYE, and enroll in the program, you won’t get kicked out of it, even if you lose eligibility.

What will happen, however, is that your unpaid interest will be capitalized, and your monthly payments will be recalculated as if you were enrolled on the 10 year standard plan.

The bright side is that you’ll still reap major benefits from being enrolled in PAYE, for as long as you qualify, and the bad news is that the gravy train ends once you no longer really “need” the benefits (need in quotes because it’s according to the Government’s eligibility rules).

On the Repayment Calculator –

It could be accurate because of interest accumulation and recapitalization. The bad news is that whatever amount you have forgiven will be counted as taxable income during the year it’s forgiven, and you’ll end up with a larger-than-normal tax bill, so be prepared to face that and start storing some cash along the way.

On $0 Monthly Payments –

A $0 payment DOES count as an on-time payment (which I think is crazy, but it’s the truth). However, remember that not making any payments leads to racking up additional interest, which, when compounded, then recapitalized at some point is going to massively inflate the total balance of your loan.

That wouldn’t matter if you weren’t planning on paying it off, except for the point that I alluded to above, in that when that inflated loan balance gets forgiven, you’ll be hit with a huge tax bill.

Lots of things to consider here, but at least it’s a straightforward process.

Sounds like you’re in a pretty good financial situation for a recent law graduate (I know quite a few in some difficult situations), so keep up the good work, remain financially responsible, and start storing some of your money for that tax bill that’s sure to come 20 years from now.

I took out a Stanford loan prior to October 1, 2007. I also took out a Direct Loan and Stafford Loan after October 1, 2007 and received a disbursement after October 2011.

I still had an outstanding loan balance on the first Stafford loan until recently (paid off in 2014). I was going to consolidate my other two loans and enroll in PAYE. But I’m not sure if I’m eligible for the repayment plan now because of that prior loan. Am I still eligible for PAYE if I had a loan prior to Oct 1 2007 that had an outstanding balance when I took out my other loans, but is paid back in full now?
Thanks!

This is a tricky question – as I originally understood it, you would NOT be eligible for PAYE because you had an outstanding loan balance prior to October 1st, 2007, but I do believe that you WILL qualify for the program now that you’ve fully paid off that loan.

The only way to know for certain is to contact whoever services your loan and let them know what you’re planning to do. Even if I say “Yes, you can do that”, it wouldn’t matter because what they say goes.

You have already addressed this question but I am still a little confused. I have about 51K in student loan dept. If I apply for PAYE repayment with the intention of paying over as much as I can does the extra money get applied to the interest or the principle? Is this a good idea or no? Is there a benifit to paying off a PAYE early? It says that if you no longer qualify for PAYE the remaining interest gets added onto your principle, what does that mean?

Extra money sent in your monthly payment will be put towards principal. It’s a good idea if you want to pay off the debt more quickly, because it reduces the amount of time that your loan will be accumulating interest, meaning that you’ll end up paying off the loan sooner.

However, depending on what your monthly payments will actually be (which is based off your income under PAYE), you may not need to finish paying off your loan (ever), because you may end up qualifying for forgiveness at some point (after 240 payments, or 120 payments if you qualify for Public Service Loan Forgiveness).

If you no longer qualify for PAYE, then whatever interest is left on the loan gets added to your principal, meaning that the total amount of the loan gets bigger.

The only way to figure out what will work for you is to put in some time to planning it out over the long-haul, using the Federal student loan estimator, and determining which plan, and what strategy, will work best for you.

First off, thank you for all of this information! Something I’m concerned about it the possibility that PAYE or the Public Loan Forgiveness Program could change within the next few years. I am nervous to take out loans to finance my education with the idea I’ll only be paying 10% of my income and then find out with the next President my plans are destroyed. What are the chances of this happening, in your opinion?

With PLUS loans I feel like I should just take out the maximum to cover all of my living expenses, tuition, etc since I’m going into social work and regardless of my debt I’ll only be paying 10% each month, right?

My personal opinion is that these programs will be enacted as specified here, and that anyone with loans previous to negative changes to the benefits will be grandfathered into the better option.

I’m assuming that the Government won’t ‘screw’ it’s borrowers here, which is honestly a major risk.

I would not recommend borrowing any more money than you absolutely have to – and only advocate borrowing enough for actual school expenses. My page about Avoiding Student Loan Debt goes into great detail about this subject.

Technically though, your analysis appears to be correct to me. As long as you’re able to enroll in the Pay As You Earn Program, your monthly student loan payments will be limited to just 10% of discretionary income.

Additionally, if you’re going to become a Social Worker, you should be eligible for the Public Service Loan Forgiveness Program, so you’ll be able to have the entire balance of your student loan debt forgiven after you’ve made 10 years of payments on that debt.

Just make sure that you’re prepared for the big tax bill that’ll hit when your debt is forgiven, because it counts as income on your IRS filing!

“Employment with a federal, state or local government agency, entity or organization counts as qualified employment for PSLF.”

I would speak with your lender as soon as possible to confirm that this is true. (In reality, the lenders have all the power when it comes to student loan debt, and no matter what the Government guidelines, or writers like me might say, it’s the lender who has to agree with your interpretation of the law).

Make sure that you’ve lined up everything they need, then keep your head down and don’t miss any monthly payments!

I was offered a plan that is supposed to cut my student loans really good. They called their company Student Loan Forgiveness. The plan they offer sounds really good, but I have to come up with money up front to pay their fee. Is this lagit and how can I be sure it’s not a con.

Many of the companies offering to cut student loans down for an upfront fee are attempting to scam people, because there’s nothing they can do that you can’t take care of yourself. Are your loans private, or Federally-funded?

is there someone somewhere that I can call and get imediate response. Need to get this done right away. seems like this pay as you earn plan will work for me. Just need to talk to someone directly. Is that possible?

They’re legally obligated to inform you about your options, and they’re the only people with all the information needed to determine what will be possible for you.

Your loan servicer is whoever you sent monthly payments to, so it shouldn’t be too hard to get in touch with them. Just check your statements (bills), and you should find a contact phone number.

NickAugust 20, 2014

Tim,

I’ve been contacted by a company stating they are able to reduce my student loans payments by enrolling me in the PAYE plan, but they charge a $500 fee to do this. Is there a fee for enrolling, assuming I qualify? Can’t I just enroll in PAYE from the studentloans.gov site myself?

– I have a federal consolidated loan with sallie Mae that was combined from two ffel stafford loans (1 subsidized, one unsubsidized). Can I reconsolidate into the DL program to qualify? I’ve been told yes by the DL program people and the SM people acted like they didn’t know what I was talking about.

– Can you file as married filing singly and just use your own income like with IBR?

– I was in deferment for about 5 years (2008-2013). I’ve heard that with IBR that time counts to the 25 years. Is that true and do you think it’ll count for PAYE?

1. I can’t give you an answer with 100% certainty, because there are still some things up in the air with the program. I would probably trust the Direct Loans people over Sallie Mae, but the problem is that you’ll have to convince Sallie Mae to go along with what they’ve said, since SM is officially responsible for your loan. See if you can get the Direct Loans people to fax or email you something in writing, then provide that to Sallie Mae and see what they say. It’s possible the person (or even people) you talked to simply aren’t up to date on their information, or even that they’ve been trained to actively resist people moving onto programs that save the borrower money, at the cost of the lender (Sallie Mae).

2. They’re trying to close this “loophole” with the latest proposed changes to the program, as included in President Obama’s 2015 Fiscal Year budget. I wouldn’t count on being able to do this, because it’s one of the major tenets of the program that’s come under attack (that and the ability to get forgiveness on very large loans).

3. Times your loan was in deferment should not count toward the PAYE forgiveness requirements. The problem is, it’s not actually based on years, but on a number of payments, and the only payments that qualify are those that were made “in full, on time, and according to schedule”. With a loan in deferment, you aren’t technically making any payments, so I don’t think that time will count. That would be a huge oversight and major loophole if it were possible, and everyone would just put their loans into deferments for as long as possible, then take their forgiveness once they’d qualified. For that reason, I highly doubt that it would work.

Hi Tim,
I just saw that Congress passed Obama’s new proposal for PAYE. And from the article I read, it stated that it offers “comprehensive student loan forgiveness”. Does this change the forgiven but taxable portion of the loan at the end of the 20 year loan term?
Thanks!

Hi Tim,
I just called Ed Financial and they told me that I am on the income contingent plan and that in 18 years I can apply for the Obama student loan forgiveness if I stay on it. Is this real? As I understood from what you said before, I have to apply for the PAYE program right? Does it count if I am on the income contingent program?
Thanks!

From my latest research, the only Federal Repayment Plan that is currently eligible for President Obama’s student loan forgiveness program is the Pay As You Earn plan. And yes, you need to get onto PAYE before your monthly loan payments will start counting toward the 240 payments requirements.

I don’t think your payments on the Income Contingent Program will count (but I could be wrong…), so I would advise switching to PAYE as soon as you can! Depending on when you took out your loans, you may be able to switch now, or you might have to wait for further legislation opening that program up to everyone with Federal student loans.

I have maybe 12k in federal loans in an ibr as well as maybe 62k in private student loans. I have been looking and looking but I can not seem to find any answers as to if I can get help with the private student loans. Are private loans not eligible for Obamas new PAYE program? Thanks!

Unfortunately Private Student Loans are not eligible for President Obama’s Loan Forgiveness Program or the Pay As You Earn Repayment Plan. Everything offered by the Federal Government applies only to Federally-funded student loans.

Good question! I honestly am not sure about this one, but from the language of the way that PAYE forgiveness works, as long as your payments are on time, scheduled, and in full, they count toward the 120/240 payments limit.

Keep in mind that 120 is only for people who qualify for the Public Service Loan Forgiveness Program, as people who don’t work in Public Service do have to make 240 total payments to receive loan forgiveness.

I am currently repaying my loans through IBR, but it seems as PAYE is a better option (i.e. will lower my payments). If you are eligible for PAYE, but are currently in IBR, and want to switch, is there a fee to switch repayment plans?

I have been reading some of the post to see if anyone had a similar questions as I did, and sure enough, I did see a few, but I still needed a bit of clarity.

Ok so I have multiple Loans through Sallie Mae, alot of them, almost all of them are in deferment; however, one has been discharged, because I was unable to make payments. I came across this company that consolidates and participates in the government forgiveness programs . They said that if Ipay them a service fee of 1% of my total debt ; they can basically get most of my loans forgiven, and the amount that remained would be the portion I would make small payments on for 20 years.

I am going to check out other companies, this company sound good, Ijust do not know if its real

Be cautious about how you proceed here – anything that this company can do for you, you can actually do for yourself. Private debt consolidation companies don’t have access to any forgiveness programs that you don’t!

What’s the name of the forgiveness program that they’re going to use to reduce your debt? When did you take out your loans, and do you know if your income is low enough to be considered under the poverty line for your state and family size?

You cannot enroll in ICR, IBR and PAYE at the same time, because they are mutually exclusive Federal Student Loan Repayment Programs. You have to pick the repayment plan that you think will work best for you. President Obama’s program is PAYE (the Pay As You Earn Repayment Plan), so if you’re looking to take advantage of the benefits he has introduced, then you’ll need to enroll in the PAYE.

To enroll in IBR, ICR or PAYE, you’ll need to fill out and submit the Income-Driven Repayment Plan Request Form, which you can find here. (Please note, this link was added in July of 2014, and the form linked to will expire on 11/30/2015).

Great question! Yes, you can always make additional payments above and beyond what your Federal student loan repayment plan calls for, but just know that your non-scheduled payments will NOT COUNT towards the 20 years worth of payments required to receive student loan forgiveness.

You WILL be cutting down the total cost of your loan though, since paying off the loan early will reduce the amount of interest you get charged over the course of the loan (I’m sure you know that part, but I added it in here for others who view this comment in the future and have the same question).

HI, question was on another website about consolidating loans. Was informed qualified for a loan consolidation. I am to make 4 payments to then at a set price after which in the 5th month it is 0 out. This isnt applied to my loan but to them for working on it on my behalf, They state they are not lawyers or part of gov. But its like hiring them to get loan consolidation. Is this valid. They go by SAC.

Do you have Federal, or Private student loans? If your loans are Federal, then I don’t think you should be paying anyone to consolidate them, but if they’re Private, it may cost money to get the process completed.

Thing is, I would bet that you could find a lender who would be willing to consolidate your loans for no cost, especially if you shopped around enough. Are your loans in good standing? How high is the interest rate? And what types of loans do you have?

Sometimes, it takes spending a few hours on the phone, emailing, etc., to find the best deal. If this is the first offer you’ve received, I would not jump at it, but would continue to look at alternative options.

Tread cautiously here, because making one bad decision can cost you a lot of money in the long run. Do you have a financial adviser, CPA, or a friend who is qualified to offer financial advice? If so, ask them before agreeing to this program.

Business news report last night said the new law signed now extends eligibility back before 2007. How far back does it go? I’ve been paying since 2000. Also, is one eligible if currently on temporary 1-year defferment set to expire this month?

The eligibility extension for the Pay As You Earn student loan repayment plan is not to allow payments made before 2007 to count toward the 240 minimum payment requirement, but to allow people who took out loans before 2007 to qualify for the program at all.

It still remains to be seen which payments will actually count towards the 240 payments requirement, but I’ll speculate based on what I’ve found around the web.

I think that the following five types of payments will count, but please don’t act based on this information, because it’s still just speculation at this point!

Payments made at any time, when enrolled in the Pay As You Earn student loan repayment plan

Payments made under the Income Contingent Repayment plan (ICR) before July 1st, 2009

Payments made on or after July 1st, 2009, under the Income Base Repayment plan (IBR), Income Contingent Repayment Plan (ICR) or Standard Repayment Plan (10 year repayment)

Payments made when the borrower has a calculated payment of zero according to the IBR or ICR plan (which happens if your income is at or below 150% of the poverty line level for your family size and state)

Payments made on or after July 1st, 2009, when the borrower’s loan is in deferment due to an economic hardship deferment

Again, these may not actually be true, so don’t start calculating your payments according to these conditions and assuming that your loan will be forgiven according to whatever date you come up with, because this is still all being resolved.

There is honestly no telling how soon the Federal Government will decide which payments actually count for this plan. The only thing they’ve said is that “The Secretary shall issue final regulations in a timely fashion after considering all public comments, as appropriate, with the goal of making the repayment option available to borrowers by December 31, 2015.”

Note the “goal” part of the above – this is not a requirement, a mandate, or a legal obligation, but a guideline for them. How often does the Government meet it’s goals? How much can we trust that they’ll hit this one?

I’ll update this page as soon as more information is released, so be sure to check back whenever anything major is announced.

Actually, I am not 100% certain on this question yet. Some details haven’t been released since the update yesterday, and the Government’s official Pay As You Earn page has not been updated to reflect the new changes either.

I’ll see if I can figure this out today, and will update this comment as soon as I do. Thanks Jason.

Yes, you can still return to school after using PAYE. The calculations determining your monthly payments would change if your income-level changed, but PAYE does not prevent you from returning to college for more education, or a higher degree level (like getting a Masters, etc.).